Despite Rising Raw Material Costs, Chemical Industry Bullish About Revenue, Jobs

Michelle Remo, “Big 4″ observer
September 07, 2011 /

Chemical industry executives are eyeing acquisitions largely aided by their significant cash on their balance sheets, which they will use to pursue strategic acquisitions, invest in technology, and expand into new markets to spur company growth despite rising input costs, stiffer competition, and a struggling global economy.

This was according to a recent survey by KPMG LLP, the U.S. audit, tax, and advisory firm. The KPMG survey was conducted in June 2011, reflecting the responses of 142 senior executives in the chemical industry – 53 in the U.S., 38 in Europe, and 51 Asia-Pacific. Based on revenue in the most recent fiscal year, 20 percent of respondents work for institutions with annual revenues exceeding $10 billion, 46 percent with annual revenues in the $1 billion to $10 billion range, and 34 percent with revenues in the $100 million to $1 billion range.

In the survey of 142 senior level chemical executives in the U.S., Europe and Asia-Pacific, 66 percent of all chemical executives say their companies will be involved in a merger or acquisition as a buyer in the next two years. European executives seemed to be more bullish, with 71 percent saying they would be buyers.

Chemical Companies Holding ‘Significant’ Cash

In addition, 70 percent of chemical executives said their companies have significant cash on their balance sheets, which they will use for acquisitions, technology, and expansion into new markets. And 80 percent plan to increase capital spending next year for new products and services, acquisitions, and research and development. According to executives surveyed in Asia-Pacific, capital spending is likely to increase.

“Overall, chemical executives are telling us that they intend to put their money to work and boost investment in key areas, and almost two-thirds of executives say they’ll invest the capital before year-end,” said Mike Shannon, global and U.S. leader of KPMG’s chemicals and performance technologies practice.

“With the struggling global economy, organic growth is a challenge and input prices continue to impact production costs,” continued Shannon. “All of these factors set the stage for increased expansion in emerging markets, M&A, and innovative product strategies as companies look to gain an edge,” Shannon added.

Mix of Regional Investment Targets

Global chemical executives cite India, the U.S., and China as the geographic regions where they intend to deploy that capital over the next two years. However, when analyzing the individual regional responses, U.S. executives favored domestic investment, while European executives favor China, and the top investment region for Asia-Pacific executives is India.

Growth Drivers

When asked about the biggest anticipated drivers of revenue growth over the next three years, chemical industry executives most frequently cited expansion into new markets, followed by new product development, acquisitions/joint ventures, and organic growth. However, the top revenue driver differed for each region. In the U.S., acquisitions/joint ventures and new products topped the list, while European executives cited market expansion, and Asia-Pacific executives cited new products and organic growth.

Forty-two percent of executives say that emerging markets currently account for more than 30 percent of their companies’ revenues. Looking ahead to 2015, the number of executives who see the revenues derived from emerging markets exceeding 30 percent rises to 61 percent.

Paul Harnick, KPMG’s global COO for the chemicals & performance technologies practice, said, “Executives in Europe and the U.S. are more concerned about the state of the global economy than their counterparts in Asia. Balancing potential global economic risks with the need to expand overseas to capture growth will be key to success.”

Bullish on Revenue

Eighty-five percent of chemical executives in the KPMG survey expect revenue to increase next year, including 27 percent who expect revenue to be significantly higher. Executives in Asia-Pacific were by far the most bullish in their revenue projections, with 96 percent expecting revenue to increase next year, including 49 percent who see a significant increase and 47 percent who see a moderate increase. U.S. executives were the least optimistic of the three regions, although still bullish, with 77 percent predicting revenue to increase in 2012.

“Clearly, executives are telling us that they expect their growth strategies to pay off. However, they’ve also identified significant challenges with volatile input prices and increased pricing pressures. In fact, more than one-quarter of executives in our survey predict their raw material costs will increase by more than 10 percent next year alone, which will certainly impact performance,” Shannon said.

Executives also appear optimistic on hiring, with 73 percent predicting the headcount to increase next year. Again, Asia-Pacific was most bullish, with 96 percent expecting to add headcount, and Europe appeared least optimistic with only 42 percent expecting increased hiring.

A report from KPMG examining the investment management industry’s readiness for the US Foreign Account Tax Compliance Act (FATCA) showed that a significant amount of work remains to be done before it commences on January 1, 2013.

Only one-third (32 percent) of fund managers surveyed expect to be ready in time for the deadline, and a significant 42 percent have not yet assessed the time needed to comply.

“While it appears the industry has a great deal of work left to do, most investment managers are not underestimating the effort or amount of change required to implement this requirement,” KPMG said.

Thirty-nine percent expect to change their distribution model and 32 percent expect some level of change to the structure of their product range to implement the requirement.

Georges Bock, global chairman of KPMG’s funds tax group, said “it appears that unless the implementation date is postponed, a large part of the industry risks being unprepared. While investment managers accept that the cost of compliance will be significant, with more than a third (35 percent) expecting to spend more than €1m to implement and comply with FATCA, we predict that a significant proportion of the industry have completely underestimated the cost impact or are assuming that generous carve outs will be available.”

Bock continued: “FATCA represents a major challenge for the investment management community. It impacts product and market strategy, distribution strategy and business models, as well as the fundamental configuration of funds and legal entities. Its scope is significantly broader than the current qualified intermediary regime and its requirements cannot be met with existing processes and systems. In order to comply with FATCA, fund operators will have to fundamentally change their operating models, from the identification and documentation of customers, through the product portfolio, to internal processes and IT systems. Many are finding this process incredibly complex and time consuming.”

Tom Brown, European head of investment management at KPMG in the UK, added: “For many, compliance will be a major headache – but one that cannot be avoided. Individual firms need to thoroughly think through the strategic implications of FATCA as a matter of urgency. While 2013 may seem way off, most US financial institutions and foreign financial institutions (FFIs) have predicted that implementation will take up to 24 months. Time is running out.”

Complying with FATCA will be necessary for any FFIs that plan to continue investing in the US economy. In order to be FATCA compliant, investment funds will have to identify US persons that hold affected accounts or financial instruments on a direct and indirect basis – across the global business.

Identifying and providing the relevant information to the IRS will pose a major challenge. Non-participation with the FATCA regime will be expensive and customer relationships will be at risk if clients are unnecessarily subject to withholding or have confidential account information provided to the IRS.

For some players the primary FATCA strategy will be to seek cost efficient solutions; for others, mitigating non compliance risk will be of prime importance; still others will focus on the search for new business.


Share your opinion

SEO Powered By SEOPressor